Toomre Capital Markets LLC

Real-Time Capital Markets -- Analytics, Visualization, Event Processing, and Intelligence

Lars Toomre's blog

Congratulations to old friend Lehman Brothers' Bart McDade

Today's Wall Street Journal reports that an old friend, Bart McDade of Lehman Brothers, has been promoted from running the fixed-income division to now heading all of Lehamn's stock business. In his place as head of the bond department will be another former colleauge, Mike Gelband, who traded fifteen-year mortgages back in the late 1980s. Aldon Hynes and Lars Toomre know both Bart and Mike from their days at the head of the Lehman Brothers' Collateralized Mortgage Obligation business, and wish them both well with their new endeavors.

Stability returns to the CDO market?

There was considerable turmoil this past week in the bond markets, particularly in the structured credit sectors which include collateralized debt obligations ("CDOs") and credit default swaps ("CDS"). An article in Friday's Financial Times of London suggests that stability has returned to this sector.
The Financial Times article read in part: "There was fresh turmoil in the credit markets this week as rumours swirled about large losses on credit derivatives after Standard & Poor’s downgraded Ford and General Motors to junk status on May 5.

"The activity highlighted the role of credit derivatives, in particular collateralised debt obligations – packages of corporate debt instruments that are parcelled out in slices with different levels of risk. The talk was that some hedge funds and bank proprietary desks had lost money on risky CDO bets.

"But the markets recaptured some stability by the end of the week. In a report published on Friday, S&P says: 'We conclude that the [European] synthetic CDO market has passed its most widespread test to date.'”

Third Annual Enterprise Risk Managment Symposium in Chicgo, IL - May 1st through May 3rd

A number of people have contacted Lars Toomre to ask his opinion on possibly attending the Third Annual Enterprise Risk Management Symposium that will be held in Chicago, IL from May 1st through May 3rd. As the former Enterprise Risk Management underwriter for the Munich/American Re group, Lars is intimately familiar with many aspects of the ERM approach, and recognizes both its promise and many pratfalls. He nonetheless strongly recommends that anyone truly interested in the field of risk management attend this conference, particularly those individuals with a quantitative background and/or interest.

The ERM Symposium is sponsored by the Casualty Actuarial Society, the Professional Risk Managers' International Association, and the Society of Actuaries.

The 2004 program was reportedly attended by more than 350 risk management professionals including chief risk officers, chief financial officers, chief actuaries, risk managers, investment professionals, ALM practitioners, and actuaries interested in risk management roles. What the Wall Street quanitative individual particularly will get out of this conference is the complexity of dealing with writing long-dated, highly illiquid, far out of the money options. The language is a bit different than the Wall Street quant is typically accustomed to, but the analystic methods are much the same between actuaries and Wall Street quants.

For more information or to register for the conference, visit http://www.ermsymposium.org or call (703) 276-3100.

Inter-Ocean Holdings Ltd. of Bermuda enters run-off...

Earlier today in Business Insurance, the following article appeared. Lars will come back and comment on the significance of this news in a short while after some meetings.

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Finite reinsurer Inter-Ocean enters runoff

by Douglas McLeod
Posted on April 07, 2005 4:31 PM CST

HAMILTON, Bermuda—Finite risk reinsurer Inter-Ocean Holdings Ltd. has ceased underwriting and will run off the business of reinsurance units in Bermuda and Ireland.
"After much consideration, the board of directors of Inter-Ocean has decided to put the company into voluntary runoff," an Inter-Ocean spokeswoman said. "Current management will be retained in order to direct the company's runoff operations."

The spokeswoman declined to comment further on the decision, though analysts have cited the mounting regulatory scrutiny of finite reinsurance as a potential roadblock to Inter-Ocean's future business prospects.

Institutional Insurance Market Is Changing.... BIG TIME!!!

The market for institutional insurance and reinsurance is undergoing traumatic changes partly as a result of the on-going SEC and NY State Attorney General probes regarding finite reinsurance. The accounting for (re)insurnace contracts never quite really fit into the FASB and Generally Accepted Accounting Principles ("GAAP") framework. As a result, the accounting profession and financial executives of insurance/reinsurance companies adopted a set of guidelines that never were quite codified.

For instance, in the FASB world, believe it or not, there is no definition of what is an insurance contract. Therefore, the practioners have adopted the practice that an agreement is a contract of insurance if there is at least a chance of a 10% loss occurring 10% of the time. How those two numbers are calculated is the proverbial "devil is in the details." A slight shading of an assumption (or model input) can often dramtically change the resulting loss distribution and/or frequency of occurance. Hence, two different insurers looking at exactly the same insurance event can come up with dramtically different terms, captial requirements, insurance premiums, and so forth.

Trade Deficits Leave America Vulnerable??

Record United States trade deficits leave some economists worried that the dollar could collapse, sending interest rates sharply higher and the economy reeling. U.S. workers, meanwhile, worry that American jobs are increasingly susceptible to outsourcing overseas.

A recent report from McKinsey & Co. suggests, however, that America is not nearly so vulenerable as first envisioned. "Far from reflecting the weakness of the U.S. economy, at least a third of the current-account deficit is actually evidence of its strength," the report says. "The U.S. acts as the world's financial intermediary, gathering up and allocating global savings to companies that then invest them around the world," it later concludes. Diana Farrell is director of the McKinsey Global Institute and co-author of this study on multinationals.

Karol Wojtyia -- may he rest in peace -- will be missed ...

Karol Wojtyia spoke upon being elevated to Pope John Paul II, "Be not afraid." Today the world is less well off with his passing on Saturday at age 84, may he rest in peace.

Pope John Paul II was the second longest serving Pope ever and certainly oversaw profound changes in the world since his elevation back in 1978. Then, there very much was an Iron Curtain with the Communist Eastern Europe divided from the modern liberal Western Europe. However, "as he never ceased to declare, Communism's core failure was not economic. It was anthropological, stemming from its false understanding of human nature."

"Karol Wojityla did not learn this from text books. He was old enough to recall how the twin totalitariasms of our age -- facism and Communism -- were each once lauded by intellectuals as the inevitable destination and promise of the future. In Poland he tasted them both, yet he remained unitimidated. This experience would shape his entire papacy, a testament to his conviction that moral truth has its own legions."

Palace Coup -- Some Background on AIG and the CEO Hank Greenberg ouster

The story of former CEO Maurice "Hank" Greenberg's reign and swift downfall at American International Group has yet to be fully told. The following story from the Friday, April 1, 2005 edition of the Wall Street Journal is a start. This is an excellent article written by Monica Langley, a staff reporter of The Wall Street Journal.

For those that do not have access to the full version of the article carriend via on-line version of The Wall Street Journal, let me highlight several of the more prominant paragraphs. These include:

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Palace Coup, After a 37-Year Reign at AIG, Chief's Last Tumultuous Days, Faced With Indictment Threat, Directors Move Quickly Against Mr. Greenberg

By MONICA LANGLEY, Staff Reporter of THE WALL STREET JOURNAL, April 1, 2005; Page A1

[...] The showdown set in motion a frantic 48 hours that ended Monday [March 28, 2005] with Mr. Greenberg's abrupt resignation as AIG's longtime chairman. Before it had ended, New York Attorney General Eliot Spitzer told AIG lawyers he was dismayed over what he called the "document caper," according to people familiar with the matter.

"As long as Hank's still the chairman, AIG is still accountable," Mr. Spitzer told AIG's outside lawyers on the phone Saturday night from his Colorado skiing vacation, these people say. "You have serious criminal exposure." Then, according to these people, Mr. Spitzer issued the ultimate threat: His office would indict AIG on Monday [Maarch 28th] if action wasn't taken.

No financial firm has ever survived a corporate indictment. Some of AIG's independent directors argued Mr. Greenberg had to go immediately in order to protect the company, according to those familiar with the situation. They had essentially already taken control of the company because of the sweeping regulatory probe into whether AIG bolstered its financial condition with improper accounting.

Non-traditional insurance products snare AIG and General Re???

Many participants in the capital markets seem to miss the significence of the combined Securities and Exchange Commission and New York State reviews of the non-traditional insurance products, an area that the article below notes was "until recently [an] obscure class of financial transactions that authorities believe some companies have used to manipulate their financial statements." This article seems to confirm some of the persistent rumors that AIG and General Re were very active participants in this area. Further, there may well be some truth to the rumors that have been quietly circulating about mis-deeds. Very clearly the last shoe has not yet dropped on indictments of either companies or individuals, including some very senior executives...

An astute reader might want to keep a keen eye out for more news and articles regarding the role of the off-shore insurers in non-traditional insurance products. The full story is far from completely told yet...

An Ideal Teacher Definitiion

In the stimulating book Living, Loving and Learning by professor and author Leo F. Buscaglia, there is a wonderful reference to who are life's ideal teachers. Specifically, Leo Buscaglia recounts that "ideal teachers are those who use themselves as bridges over which they invite their students to cross, then having facilitated their crossing, joyfully collapse, encouraging them to create bridges of their own."

About Lars Toomre

Lars Toomre (resume) is a Managing Director at Toomre Capital Markets. Lars has more than two decades of experience assessing, modeling, analyzing, pricing, underwriting, transacting in and managing risk. His specific areas of expertise are in mortgage and asset-backed securities, financial engineering, risk securitization and other highly complex structured finance transactions. Lars has engineered and underwritten billions of dollars worth of transactions and launched many significant structured finance innovations. A leader in financial innovation, Lars priced the first residual class, the first floating-rate CMO class, the first inverse-floating rate CMO class, the first federal asset-backed security and the first public sale of a subordinated class from an ABS securitization, all precursors to what is generically referred to as “toxic waste” component of special purpose entities (SPE’s). This illiquid and volatile area of capital markets is critically important for the successful origination and placement of the more popular senior classes.

About Toomre Capital Markets LLC

Toomre Capital Markets (“TCM”) is a financial engineering consultancy that applies computational finance, risk management, structured products and advanced technology to help businesses optimize Economic Value Added.

TCM strives to be the premier partner to the select few, who professionally and intellectually embrace the concept of Economic Value Added ("EVA"). In today’s swiftly evolving/ consolidating Capital Markets, information flows at heightened levels of insistence and intensity. TCM and its clients must constantly strive to transform raw data- people, securities, organizations, holdings, exposures, risks, prices, products and their interrelationships – into knowledge. We must learn to drink from the proverbial “spewing fire hydrant of information flow”; then turn that knowledge into VALUE! This is a continuous process for all involved because the minute you think you know something cold, the markets have a befuddling habit of teaching you just how much more you have to learn.